Desinging Guarantee Options in Defined Contributions Pension Plans

Andrea Consiglio (), Michele Tumminello and Stavros A. Zenios
Additional contact information
Michele Tumminello: University of Palermo
Stavros A. Zenios: University of Cyprus

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: The shift from defined benefits (DB) to defined contributions (DC) is pervasive among pension funds, due to demographic changes and macroeconomic pressures. In DB all risks are borne by the provider, while in plain vanilla DC all risks are borne by the beneficiary. For DC to provide income security some kind of guarantee is required. A minimum guarantee clause can be modeled as a put option written on some underlying reference portfolio of assets and we propose a discrete model that optimally selects the reference portfolio to minimise the cost of a guarantee. While the relation DB-DC is typically viewed as a binary one, the model setup can be used to price a wide range of guarantees creating a continuum between DB and DC. Integrating guarantee pricing with asset allocation decision is useful to both pension fund managers and regulators. The former are given a yardstick to assess if a given asset portfolio is fit-for-purpose; the latter can assess differences of specific reference funds with respect to the optimal one, signalling possible cases of moral hazard. We develop the model and report extensive numerical results to illustrate its potential uses.

Date: 2015-02
New Economics Papers: this item is included in nep-age and nep-ger
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://fic.wharton.upenn.edu/fic/papers/15/p1503.html
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fic.wharton.upenn.edu/fic/papers/15/p1503.html [301 Moved Permanently]--> https://wifpr.wharton.upenn.edu/fic/papers/15/p1503.html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:15-03

Access Statistics for this paper

More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().